OCCIDENTAL CHEM. CORP. v. POWER AUTH. OF NEW YORK

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NEW YORK

March 11, 1992

OCCIDENTAL CHEMICAL CORPORATION; THE PILLSBURY COMPANY; GENERAL MILLS, INC.; BETHLEHEM STEEL CORPORATION; NABISCO BRANDS, INC.; and UNION CARBIDE CORPORATION, Plaintiffs, -vs- THE POWER AUTHORITY OF THE STATE OF NEW YORK, Defendant.

Prior to the enactment of the NRA by Congress on August 31, 1957, a private utility--the Niagara Falls Power Company ("NFPC"), predecessor company of the Niagara Mohawk Power Corporation ("Niagara Mohawk")--controlled the hydroelectric power-generating capabilities of the Niagara River. Around the turn of the century, NFPC built two hydroelectric facilities on the Niagara: the Adams Plant and the Schoellkopf Station. The Adams Plant generated approximately 80,000 kilowatts ("kW"), and the Schoellkopf Station generated approximately 365,000 kW. In the beginning, NFPC obtained water flow to support these facilities from grants issued by the New York State legislature. After 1909, however, when Canada and the United States signed the Boundary Waters Treaty, the diversion of water from the Niagara for power generation was governed by international agreement. Then, with the passage in 1920 of the Federal Water Power Act, NFPC was required to obtain a federal license for its Niagara facilities. NFPC obtained a fifty-year license from the Federal Power Commission ("FPC") on March 2, 1921. 1 F.P.C. 16 (Item 43, Exhs. 12-14).
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As this was the sixteenth license issued by the newly formed FPC, NFPC's twin hydroelectric plants came to be known as Project 16. NFPC was granted additional small allocations of water in 1926 and 1928, see Item 43, Exhs. 13-14, and a larger allocation in 1941, after an agreement between the United States and Canada to divert more water for hydroelectric power generation. See 2 F.P.C. 461 (Item 43, Exh. 28).

In 1950, the United States and Canada signed a new treaty ("1950 Treaty") which authorized the United States to divert a larger portion of water from the river than Niagara Mohawk could utilize at its twin hydroelectric plants. 1 U.S.T. 694.
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During ratification, the United States Senate attached a reservation to this treaty which prohibited redevelopment of the Niagara River without express Congressional authorization. Id. at 699. The enactment of this reservation precipitated a seven-year debate in Congress over how to best develop and allocate hydroelectric power from the Niagara resource. Three main questions occupied Congress: (1) Should public bodies and nonprofit cooperatives be given preference to Niagara power and, if so, what form should the preference clause take?; (2) How much power, if any, should be reserved for preference customers in adjacent states?; and (3) Who should be licensed to develop the Niagara resource--a private utility, PASNY, or the federal government? Only the last of these questions directly concerns us here.

The NRA directed the FPC, since renamed the Federal Energy Regulatory Commission ("FERC"), to issue a license to PASNY to construct and operate a hydroelectric power project on the Niagara River to utilize all of the water allocated to the United States by treaty with Canada. 16 U.S.C. § 836(a). Given the additional water allocation, the new project was capable of producing 1,800,000 kW of firm power, nearly four times the power output of Niagara Mohawk's obsolete power stations. Congress directed the FPC to include in the license, in addition to those conditions deemed necessary by it under the Federal Power Act, 16 U.S.C. § 791a et seq., seven additional conditions governing the distribution and sale of the new project's power. The first condition granted "public bodies and nonprofit cooperatives within economic transmission distance" preference to acquire fifty percent of the project's power. 16 U.S.C. § 836(b)(1). This power was to "be made available at the lowest rates reasonably possible and in such manner as to encourage the widest possible use . . . ." Id. Preference power not purchased by public power companies could be sold to private utilities, as long as "flexible arrangements" were made "to meet the reasonably foreseeable needs of the preference customers." Id. See Power Auth. of the State of New York v. Federal Energy Regulatory Comm'n, 743 F.2d 93, 103-07 (2d Cir. 1984) ("PASNY v. FERC") (interpreting preference clause of NRA). The second condition directed PASNY to make available to preference customers in neighboring states up to twenty percent of the fifty percent available to preference customers in New York. 16 U.S.C. § 836(b)(2).

In the event project power is sold to any purchaser for resale, contracts for such sale shall include adequate provisions for establishing resale rates, to be approved by the licensee [PASNY], consistent with paragraphs (1) and (3) of this subsection.

16 U.S.C. § 836(b)(5).

During the seven-year debate in Congress leading to passage of the NRA, numerous hearings were held, see, e.g. Item 42, Exhs. 6-11 (excerpts of hearing transcripts), and more than twenty bills were introduced. Several early bills called for private development. Other bills called for federal development. By the time of the rock slide, however, the overwhelming sentiment in Congress was to designate PASNY to develop the project. Plaintiffs argue that the main reason Congress chose PASNY over a private developer was that PASNY, as a nonprofit governmental agency, could produce the power more cheaply. PASNY could do this for three reasons: (1) it was exempt from state and federal taxes; (2) it could finance new construction less expensively through the sale of tax exempt bonds; and (3) as a nonprofit agency, it would not need to offer shareholders a rate of return on their investment. See Item 38, PP23, 28. This appears to have been one of the reasons Congress selected PASNY to develop the Niagara River. See House Report, supra, at 7 ("The power can be produced by the power authority at a cost below that of other available sources of power."). There is no evidence, however, that it was the only reason.

Once the NRA was passed, on January 30, 1958, the FPC issued a license to PASNY. 19 F.P.C. 186. This license incorporated verbatim the entire text of the NRA. Id. at 193-95. The license was dated September 1, 1957, and made effective for fifty years. PASNY completed construction on and began operation of the Niagara project in 1961.

After completing the hydroelectric project, in February, 1961, PASNY entered into a contract--Contract NS-1--to sell 1,190,000 kW of power to Niagara Mohawk for resale to its customers. Of this allocation, 445,000 kW was designated as Replacement Power to be sold in accordance with the NRA to industrial customers within thirty miles of PASNY's Niagara switchyard. Stem 44, Exh. 61, Part Two, Art. VI [hereinafter Contract NS-1]. PASNY specifically reserved the right within this contract to modify rates charged to Niagara Mohawk for Replacement Power.

The rate schedules specified in this contract shall be subject to successive modification by the Authority through the promulgation of superseding rate schedules.

Contract NS-1, supra, General Power Contract Provisions, Part E at 24.

PASNY set the initial price for Replacement Power in 1961 at an average cost to industry of less than one-half cent per kWh (4.38 mills). Contract NS-1, supra, Schedule NP-F1. This rate remained constant until 1990. Plaintiffs receive this power pursuant to resale contracts with Niagara Mohawk at a price equal to Niagara Mohawk's cost plus a transmission and delivery charge. See Contract NS-1, supra, Exh. B. On September 26, 1989, PASNY filed notice of its first proposed increase in Replacement Power rates since 1961. Item 44, Exh. 78, P31. At that point:

Turning to the text of the NRA, the first section directed the FPC, now named FERC, to issue a license to PASNY to develop a hydroelectric power project on the Niagara River utilizing all of the water allocated to the United States under the 1950 Treaty. 16 U.S.C. § 836(a). The FPC was instructed to include within this license seven conditions governing the distribution and sale of power generated by the project. 16 U.S.C. § 836(b). See supra (discussing conditions). This court must interpret the meaning of the third of these seven conditions. The entire text of that condition is as follows:

The licensee [PASNY] shall contract, with the approval of the Governor of the State of New York, pursuant to the procedure established by New York law, to sell to the licensee of Federal Energy Regulatory Commission ("FERC") project 16 [Niagara Mohawk] for a period ending not later than the final maturity date of the bonds initially issued to finance the project works herein specifically authorized, four hundred and forty-five thousand kilowatts of the remaining project power, which is equivalent to the amount produced by project 16 prior to June 7, 1956, for resale generally to the industries which purchased power produced by project 16 prior to such date, or their successors, in order as nearly as possible to restore low power costs to such industries and for the same general purposes for which power from project 16 was utilized:

Second, plaintiffs focus on the word "restore" and argue, based on Webster's dictionary, that "restore" means to "to bring back into existence or use," or "to bring back to an original state." Webster's II New Riverside University Dictionary (1984). This argument essentially repeats the first argument--that Congress intended to "restore" the low three mill rate industries enjoyed prior to the rock slide--albeit with a slightly different emphasis. Plaintiffs point out that the three mill rate charged some industries receiving power from Project 16 was based on Niagara Mohawk's expenses associated with that project, not with other more expensive power-generating facilities it owned. Plaintiffs also point out that the principal expense in generating hydroelectric power is the cost of debt service associated with the initial construction of the hydroelectric facility. Niagara Mohawk was able to sell a substantial portion of Project 16 power at the three mill rate for more than forty years because it built the Project 16 plants at the turn of the century and its expenses remained stable throughout this period. Finally, plaintiffs point out that the industries which had located in this region to take advantage of these low rates testified before Congress of their concern that electricity costs remain stable over a long period so they could plan for the future.
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From these premises, plaintiffs then leap to the conclusion that

Plaintiffs' reading of the statute appears to the court to be quite contrived. The words chosen by Congress simply do not support the meaning ascribed to them by plaintiffs. Let us proceed step by step.

The phrase "restore low power costs" also cannot mean "sell at cost" or "restore power sold at cost" by plaintiffs' own analysis. Plaintiffs' main argument is that the phrase "low power costs" in § 836(b)(3) was understood by Congress to refer to the three mill rate charged to high-load industrial customers of Project 16. Plaintiffs readily admit that, prior to the rock slide, Niagara Mohawk provided these industries with "low power costs." What plaintiffs fail to point out, however, is that even though the three-mill rate charged by Niagara Mohawk was very low, and had not been changed for some customers for more than forty years, it was never sold by Niagara Mohawk "at cost." Niagara Mohawk, as a private utility, set the rates for each category of Project 16 power so that it would reap a profit on that sale. Indeed, it appears that Niagara Mohawk's "cost" of production of Project 16 power was approximately one-and-one-half mills, or roughly fifty percent of the rate it charged industrial customers.
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Thus, Congress, which was well aware of these facts when it drafted the NRA, could not have meant by the phrase "restore low power costs to such industries" to require PASNY to sell Replacement Power "at cost," because industries in the Niagara region had never received Project 16 power "at cost."
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At most the phrase requiring PASNY to sell Replacement Power to Niagara Mohawk for resale "in order as nearly as possible to restore low power costs to such industries" meant that PASNY should provide low-cost power to these industries.
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The phrase "low power costs" means what it says: low-cost power. It does not mean "at cost" power.

It is also important to look at all of § 836(b)(3) when investigating the meaning of the particular phrase plaintiffs focus on. As mentioned previously, § 836(b)(3), strictly speaking, did not require PASNY to sell 445,000 kW of project power to Niagara Mohawk at all. The arrangement under which PASNY would contract with Niagara Mohawk for the sale of 445,000 kW of project power was contingent on the proviso that Niagara Mohawk be willing to surrender its FPC license and any other claims to Niagara water it may have had, plus any claims for compensation and/or damages associated therewith. The Senate report accompanying the NRA stated that should Niagara Mohawk for any reason not agree to the arrangement, PASNY was free to market Niagara project power to whomever it chose. See supra. The statute also specified that the Replacement Power contract between PASNY and Niagara Mohawk, if it were consummated, should be "for a period ending not later than the final maturity date of the bonds initially issued to finance the project . . . ." 16 U.S.C. § 836(b)(3) (emphasis added). This language, which is not in dispute, indicates that Congress was concerned with the immediate crisis facing industry in the late 1950s and early 1960s. There is no indication from the statute that Congress intended that the rates for Replacement Power be fixed at their 1961 level, the year the NRA facilities were completed, indefinitely into the future.

Accordingly, based solely on an analysis of the statutory language, the court finds that the NRA does not require a cost-based rate for Replacement Power.

To this court it is clear that Congress's main concern in providing low-cost power to industry in the Niagara region was to avoid economic dislocation should such industry be forced to move their operations in search of lower-cost power. This concern has been satisfied.
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Industry has not moved from the Niagara region because, even with the higher rates so far implemented by PASNY,
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Replacement Power is still apparently the cheapest firm industrial power in the United States, and by a wide margin.
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Until Replacement Power rates were increased for the first time in January, 1990, the effects of inflation had steadily diminished the cost to industry of Replacement Power. At the end of 1989, Replacement Power cost industry just thirty-five percent in real terms of what it cost industry in 1961. See Item 39, P61. Meanwhile, other industrial rates charged Niagara area industries continued to increase, such that even at the 1992 rate of approximately one cent per kWh, Replacement Power cost less than one-sixth the rate charged to Niagara Mohawk's other industrial customers in the Niagara area. Id.

Plaintiffs' final argument is that Congress could not have intended to grant PASNY unfettered discretion to determine the rates it would charge for Replacement Power. See, e.g. Item 37 at 14 n.7. This argument, of course, begs the question of what Congress intended without providing meaningful additional evidence or analysis. Besides, PASNY's actions are not completely beyond review. Even in cases where courts have held that Congress has provided "no law to apply," see OCC v. PASNY, 758 F. Supp. at 857-58 (discussing cases), if an agency "has ignored a plain statutory duty, exceeded its jurisdiction, or committed constitutional error," a court may step in. Hahn v. Gottlieb, 430 F.2d 1243, 1251 (1st Cir. 1970). See also Langevin v. Chenango Court, 447 F.2d 296, 304 (2d Cir. 1971); Massachusetts Pub. Interest Group v. United States Nuclear Regulatory Comm'n, 852 F.2d 9, 19 (1st Cir. 1985). Moreover, the NRA itself is not without checks on the discretion of PASNY. First, PASNY was required to obtain a license issued by the FPC. Second, PASNY's contract with Niagara Mohawk for the sale of Replacement Power was subject to "the approval of the Governor of the State of New York, pursuant to the procedure established by New York law . . . ." 16 U.S.C. § 836(b)(3). Finally, PASNY was required to convince Niagara Mohawk to consent to the surrender of its FPC license, along with any claims for damages associated therewith, before PASNY could gain access to all of the water flow from the Niagara River. Id.

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